🧾 Employee vs Employer Contributions to PF/ESI: Disallowed or Allowed? What Does Courts say

In the world of tax compliance, one of the most frequently litigated topics is the allowability of PF/ESI contributions — especially when paid after the due date under the respective Acts but before the Income Tax return is filed.

And if you’re thinking, "Didn't the Supreme Court already settle this in Alom Extrusions?", well… yes and no.

Let’s break it down.

🔍 The Law: Sections 36(1)(va) vs. 43B

• Section 36(1)(va) deals with employee’s contribution to provident fund or ESI — money deducted from employees' salary.

• Section 43B(b) deals with employer’s contribution — the employer’s share under PF/ESI.

The confusion arises when these contributions are not paid by their respective due dates under the PF/ESI Acts, but are still paid before filing the ITR.

🧑‍⚖️ The Judicial Journey: From Relief to Restriction

✅ 1. Alom Extrusions Ltd. v. CIT (2009) [SC]

Held: If PF/ESI (both employee and employer) is paid before ITR due date, it is fully allowable.

• Reason: The 2003 amendment to Section 43B removed the phrase “during the previous year” and thus allowed such payments till return filing.

• Result: Huge relief to taxpayers for a decade.

⚠️ 2. Gujarat State Road Transport Corp (GSRTC) (2014) [Gujarat HC]

Held: Employee contributions are strictly governed by 36(1)(va) and must be paid within due dates of respective Acts.

• Anything beyond that = disallowance.

• This started diverging from the Alom view.

✅ 3. AIMIL Ltd. v. CIT (2010) [Delhi HC]

Held: Even employee contributions paid before return filing are allowable.

• This followed the Alom spirit, but did not differentiate between sections.

❌ 4. Checkmate Services (P) Ltd. v. CIT (2022) [SC] – The Gamechanger

The SC clearly drew the line between employer and employee contributions.

Key Points from the Checkmate Ruling:

• Employee’s contribution is governed by Section 36(1)(va) and is not eligible for deduction if paid late, even if paid before filing return.

• Employer’s contribution is governed by Section 43B, and can be allowed if paid before filing return.

• The 2003 amendment to Section 43B does not override 36(1)(va).

This landmark judgment overruled earlier lenient views and reinforced strict compliance for employee dues.

🧠 Why Did the SC Take This View in 2022?

• Legislative clarity: The Finance Act 2021 inserted Explanation 2 to 36(1)(va), reiterating this distinction.

• Moral argument: Employee contributions are trust money, deducted from salaries — the employer must deposit them in time.

📌 Summary Table:

Type of Contribution	Section	Due Date Applicable	Deductible if Paid Before Return Filing?
Employer’s PF/ESI	43B	Section 139(1) Due Date	✅ Yes
Employee’s PF/ESI	36(1)(va)	PF/ESI Act Due Date	❌ No

🧾 Practical Implications:

1. Tighten payroll compliance: Employers must ensure employee PF/ESI deductions are deposited on time.

2. ERP & Audit checks: Flag any delay and disallow it in books/tax audit reports.

3. Tax Planning: Employers can’t claim “paid before return” as an excuse anymore — courts won’t allow it post-Checkmate.

🧾 Claiming Deduction in Future Years – What the Law Allows

While employee contributions to PF/ESI that are not paid within the due date under the respective Acts are permanently disallowed, employer contributions enjoy a more flexible treatment under Section 43B.

If the employer’s contribution is not paid before the due date of filing the income tax return, it cannot be claimed in that financial year. However, the deduction is not lost — it can be claimed in the year in which the actual payment is made.

This means:

• Delayed employer contribution is allowed in the year of payment.

• Delayed employee contribution is never allowed, even if later paid.

This distinction ensures that while genuine payment delays by employers can still be accommodated, employee deductions must strictly follow statutory timelines, as they are considered held in trust.

🔚 Conclusion

The distinction between employer and employee contributions to PF/ESI is no longer a grey area. With the Supreme Court’s judgment in Checkmate Services Pvt. Ltd., the law has drawn a clear line:

• Employer’s contributions are governed by Section 43B and can be allowed on actual payment basis, even if paid late.

• Employee’s contributions, governed by Section 36(1)(va), must be paid within the statutory due date — or the deduction is lost permanently.

For businesses, this is not just a matter of tax planning — it’s a matter of responsible compliance. Delays, even if unintentional, can lead to irreversible tax disallowances.

👉 Timely payment of employee deductions is not just good accounting — it’s the law.